ONE of Australia's biggest egg producers has misled consumers, trying to pass off product as free range when their hens were housed in crowded barns, the Federal Court has found.

The court has slapped Pirovic Enterprises with a $300,000 fine and ordered the company to contribute to the legal costs of the Australian Competition and Consumer Commission.

The decision is the first time a court has given guidance about what constitutes a free range claim.

The consumer watchdog had accused Pirovic of falsely labelling eggs as free range and claimed that their chickens were free to roam.

The company used egg cartons which included the words 'free range' and images of hens on open pasture.

But the Court found that the eggs supplied by Pirovic were produced by hens, most of which did not move about on an open range on most days and were instead housed in crowded barns.

"This decision provides very clear guidance that any free range egg claim must be backed by farming conditions and practices implemented by suppliers under which hens actually move about on an open range each day," ACCC chairman Rod Sims said.

Mr Sims said credence claims such as 'free range' were "powerful tools for businesses to distinguish their products"

"However, if they are false or misleading, they serve to mislead consumers, who may pay a premium to purchase such products."

The ACCC and Pirovic had agreed on joint submissions and proposed orders to be put to the Court for consideration, an ACCC spokeswoman said.

The court proceedings form part of an ongoing ACCC investigation into the egg industry. In April last year, the ACCC issued substantiation notices to several egg processors, demanding they prove their free range claims.

The ACCC has several criteria to test if eggs are free range, including what time of day and how frequently barns are opened, whether the chickens have been trained to remain indoors and whether the size of the outdoor area is adequate and has shade, food and water available.

Pirovic managing director Franko Pirovic said the adverse findings related to packaging and farming conditions that were phased out completely by January this year.

"Pirovic voluntarily committed to an upgrade of its free range sheds by significantly increasing the number and size of the openings which allow the hens to access the outdoor ranging areas," he said.

"Pirovic also voluntarily made other changes to its free range farming practices, including increasing the size of some of its outdoor ranging areas. Those changes were implemented on a rolling basis throughout 2013 and completed by January 2014."

He said the case highlighted the need for a "mandatory and uniform standard for free range egg production to provide certainty for consumers and egg producers".